Sears Holdings Corporation (SHLD) posted fourth-quarter fiscal 2014 results, wherein the company’s adjusted loss per share narrowed year over year, benefiting from aggressive cost cuts. However, the top line continued to deteriorate year over year, as a result of removal of assets. Shares of Sears Holdings have dropped 4.9% since the announcement.
The beleaguered retailer’s quarterly adjusted loss came in at 34 cents per share, significantly narrower than the loss of $1.61 per share recorded in the year-ago quarter. Also, on a GAAP basis, the company's loss narrowed to $1.50 per share, compared with a loss per share of $3.37 in the prior-year period.
Quarterly Details
Revenues plunged 23.5% year over year to $8,099 million, owing to the deconsolidation of Sears Canada, which took place in Oct 2014; segregation of the company’s Lands' End business during first-quarter fiscal 2014, and lower sales from Kmart and Sears Full-line stores on account of store closures.
Further, per sources, revenues were adversely impacted by stiff competition from players like Target Corp. (TGT), Wal-Mart Stores Inc. (WMT) and The Home Depot, Inc. (HD).
Segment-wise, sales at Sears Domestic plunged 17.1% to $4,552 million, while Kmart’s sales declined 11.5% to $3,547 million during the fourth quarter.
Consolidated domestic comparable store sales (comps) declined 4.4%, with comps at Sears Domestic and Kmart falling 7% and 2%, respectively. At Sears Domestic, comps were mainly battered by unfavorable consumer electronics industry trends, while comps at Kmart were hurt by the same factor along with weakness witnessed in grocery & household goods. However, Kmart gained some relief from strength witnessed in the apparel, jewelry, seasonal and toys businesses.
Sears Holdings is looking for opportunities to transform its business to a member-centric model through its Shop Your Way program. As part of this remodeling, the company is heavily investing
in its Shop Your Way program while strategically reducing its store count and divesting its underperforming businesses. This move seems to be bearing fruit as a significant portion of the company’s revenues in the reported quarter were contributed by this program.
Deeper Insight
Gross profit slumped 20.3% to $1,978 million in fourth-quarter fiscal 2014, compared with $2,482 million reported in fourth-quarter fiscal 2013. However, gross profit margin expanded 100 basis points (bps) to 24.4%, as both segments reported an improvement in gross margin, benefiting from lower promotional activity.
The company's selling, general and administrative (SG&A) expenses declined 23.4% to $2,002 million, benefiting from a drop in advertising, payroll and insurance costs.
Domestic adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) in fourth-quarter fiscal 2014 were $125 million, comparing favorably with a loss of $92 million in the year-ago quarter. Operating loss came in at $129 million, as against a loss of $132 million in the year-ago quarter, reflecting an improvement in SG&A.
Fiscal 2014: At a Glance
Sears Holdings’ adjusted loss per share for the fiscal came in at $7.81, compared with a loss per share of $7.46 last year. On a GAAP basis, the company’s loss per share widened to $15.82 from $12.87 reported at the end of fiscal 2013. Further, revenues for fiscal 2014 descended 13.8% year over year to $31.2 billion, due to the same reasons justifying the quarterly decline.
Other Developments
Management continues to work toward operating Sears Holdings as a membership company by removing the asset content of its typical retail business. In this respect, the company revealed in Nov 2014 that it is considering the formation of a Real Estate Investment Trust (REIT), in a bid to enhance its financial flexibility and improve operating performance.
The company expects the formation and separation of this trust, which will be funded by both debt and equity, to take place by May or Jun 2015. As of now, Sears Holdings plans to sell 200–300 Kmart stores to this REIT and receive the sale proceeds in excess of $2 billion. The company will issue rights offering of this planned REIT to its current shareholders.
Financials
Sears Holdings ended fiscal 2014 with cash and cash equivalents (including restricted cash) of $250 million and long-term debt and capitalized lease obligations of $3,110 million, compared with a cash balance of $1,038 million and long-term debt and capitalized lease obligations of $2,834 million at the end of fiscal 2013.
Additionally, management stated that it has penned a deal to extend and alter its $400 million short-term secured loan facility, which is due Feb 28, 2015. Per the deal terms, the company will repay $200 million by Mar 2, while the maturity of the remaining amount was stretched to Jun 1, 2015 or the receipt of the sale proceeds with regard to its expected REIT transaction – whichever takes place earlier.
The company further stated that against the first payment, the lenders will release half of its pledged collateral.
As of Jan 31, 2015, the company had $800 million available to borrow under its credit facility.
Store Update
During fiscal 2014, Sears Holdings shut down nearly 234 stores which were underperforming, with most of them being Kmart stores. However, in an attempt to retain maximum sales, the company anticipates transferring sales from these stores to other networks.
Looking Ahead
Of late, Sears Holdings has been grappling with dismal top- and bottom-line performances. However, we commend Sears Holdings’ efforts to improve its financial performance and liquidity position through various strategic measures.
The company is also implementing integrated retail customer strategies to boost online sales. Moreover, it is trying its best to improve its financial position to make the most of all opportunities and fulfill obligations. In the current fiscal, the company has generated nearly $2.3 billion in liquidity.
We believe that these strategies have the potential to bring the company back on the growth trajectory, though it still has a long way to cover.
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